Electroneek Investment Memo

Provided here is our redacted investment memorandum, detailing our rationale for investing in and leading Electroneek’s Growth Seed in 2020.

COMPANY OVERVIEW

Founded in 2019, ElectroNeek is an emerging provider of RPA software for companies of all sizes. The company describes itself as the “first Robotic Process Automation Integrated Development Environment (IDE)”, as the platform enables companies of all sizes to build bot workflows with visual programming, and to run bots in any environment. ElectroNeek aims to build a large community of “citizen automators,” junior IT professionals and business users who can adopt RPA.

ElectroNeek has been recognized as a leading RPA platform by G2 ("Top performer Winter 2020") and Capterra and has achieved traction within US Banking, Insurance, Manufacturing and Professional Services industries. To better serve customers of all sizes, ElectroNeek has built a global network of certified implementation partners, consisting of more than 200 companies worldwide.

The company has over 50 employees, with its headquarters in New York and an office in San Francisco. The company’s development and QA operations are in Russia.

THESIS

ElectroNeek is consistent with our firm’s focus on investing in Citizen Professional companies, businesses that enable the average worker to replicate the skills of experts. ElectroNeek has the potential to bring RPA to a much broader range of companies and roles than was previously possible. Reduction of the technical barrier to adoption, combined with a pricing model that is not based on volume, are two aspects of ElectroNeek’s competitive advantage.

KEY HIGHLIGHTS

• Attractive Market/Major Pain Point: The market for Robotic Process Automation Software (RPA) is growing rapidly, being described as the fastest-growing market in enterprise software by Gartner in 2019. Gartner predicts the market to grow by 20% in 2021, reaching nearly $2 billion. ElectroNeek targets an unpenetrated segment of RPA, specifically the mid-market, which has not been targeted by incumbents due to its lower budgets and less advanced IT skills. We estimate that the mid-market opportunity for RPA exceeds $800m, and we believe that market will grow rapidly over the next few years.
• Early Strong Growth: Bessemer’s 2019 “State of the Cloud” report identified rapid revenue growth as one of the characteristics that defined the best SaaS companies. The best SaaS exits took 2 to 4 years to reach $10m ARR, and between 5 to 10 years to reach $100m of ARR. ElectroNeek has demonstrated fast revenue growth since inception.
• Experienced Team: The ElectroNeek founding team has strong backgrounds in RPA and in helping to scale top technology companies. CEO Sergey Yudovskiy is a top European RPA expert, who previously ran a consulting company that worked on RPA projects for UIPath. Co-Founder/CIO Dmitry Karpov previously worked at EY for 6 years. At EY, he assisted Fortune 1000 companies with implementing RPA projects. CTO Mikhail Rozhin is formerly a senior software developer at Acronis (currently valued over $1 billion), focused on designing web applications architecture. The company recently hired Keith Abramson, formerly VP sales at Kurtosys and Director of Sales at Darktrace, as VP of Sales. Overall, the team is well-positioned to build a new company that can gain share in the category.

INDUSTRY OVERVIEW

BACKGROUND ON ROBOTIC PROCESS AUTOMATION

Modern RPA was first invented in the early 2000s, when Blue Prism (founded in 2001) released its first product in 2003. RPA originally evolved as a way for Business Process Outsourcing to be automated through reduction of manual processes. BluePrism’s CEO/Co-Founder Alastair Bathgate stated, “We were doing robotic process automation before it was called robotic process automation… We started focusing on the BPO space as a route to market, as well as an end client base… Robotics seemed to be helpful in suggesting a third way of reducing costs and improving service is by using software robots, behind onshore and offshore staff.”

In its report on RPA entitled “Understanding and Exploring Robotic Process Automation”, Deloitte defines RPA as follows: “RPA is a technology that mimics the actions of a human performing simple rules-based processes. It interacts at the application/interface layer of any application and performs the exact steps just like anyone working across multiple applications.”

According to UIPath, RPA as we know it today evolved from three technologies: a) screen scraping software; b) workflow automation tools; and c) artificial intelligence. Screen scraping evolved with the Internet, where it created a bridge between old databases and web-compatible technologies. The challenges with screen scraping include difficulty for the average business user to understand, as well as varying compatibility with existing systems and apps. Workflow automation tools evolved to automate manual business processes of knowledge workers, and RPA is a type of workflow automation. Finally, artificial intelligence introduces the potential to automate tasks in a much more fundamental manner than in the past. UIPath says, “RPA is highly dependent on both screen scraping and workflow automation, but in ways that provide more benefits for business users. Rather than being dependent on code as is required for screen scraping, RPA software allows users to establish automation and manage workflows using drag and drop features in a visual way that can be entirely independent of coding knowledge.”

In its report on RPA, entitled “Intelligent Process Automation: The engine at the core of the next-generation operating model”, McKinsey lays out the benefits of RPA. See below a diagram from the McKinsey report, where the firm describes a basic case study of a life insurance company. “With RPA, robots can replace manual clicks, interpret text-heavy communications, make rules-based decisions that don’t have to be preprogrammed, offer customers suggestions, and provide real-time tracking of handoffs between systems and people.”

The CEO of Automation Anywhere, Mihir Shukla, aptly expressed the potential of RPA in the following statement:

“RPA is a technology that allows you to type on any application, read any application screens, apply sets of rules, and with artificial intelligence make decisions. What it means is that bots can operate any software application in the world because [they] are able to do what any human being is able to do except making judgment calls. And when you think about it, banks, insurance companies, logistics companies, have thousands and thousands of people sitting in cubicles doing something, and not everybody is making a judgment call. That’s why, with RPA, and for the first time ever, you are able to automate this vast amount of work.”

THE MID-MARKET RPA OPPORTUNITY

We continue to believe that the RPA market is still in its early phases. A confluence of technology improvement and desire by enterprises to increase automation has led to the industry becoming the fastest-growing category within enterprise software. We posit that RPA will continue to evolve, powered by improvements in the underlying technologies.

Additionally, we believe that mid-market RPA is still untapped. This belief is based on an analysis of the incumbents, who have focused on large companies as customers. As an example, BluePrism had 1,677 customers at the end of 2019, By the end of 2020, BluePrism has increased its customer base to 2000 customers.

ElectroNeek remains a compelling player for multiple reasons. It is targeting the market with a product that doesn’t require expertise, removes the marginal cost of automation, and enables a better user experience than incumbents.

ElectroNeek provides the first RPA solution that comes with an unlimited number of free bot licenses and built-in Orchestrator. It lets clients automate hundreds of attended and unattended processes and run them concurrently at no cost, paying only for developer seats. Its patent-pending 'Voodoo Interfaces' enable users to automatically fix bots when the UI of the automated environment changes, significantly decreasing the need for costly maintenance of RPA solutions. It also provides a set of visual tools to make RPA heavy-lifting, like browser automation to OCR, easy for business users (Citizen Automators) and junior IT professionals.

COMPETITIVE LANDSCAPE

The RPA market is a fairly nascent market, but there’s already multiple billion-dollar companies in the category. ElectroNeek competes with other no-API RPA tools, like UiPath and Automation Anywhere. The market also has so-called “API RPA tools”, companies like Tray.io and Zapier, that can automate connections between products that offer an API. Those are not directly competitive with ElectroNeek, since they solve a different set of automation problems with a different underlying method that relies on API connectivity instead of graphical user interfaces (GUIs).

No-API RPA tools have a few characteristics:

• They have to run on a local machine or server that mimics the setup of a person’s computer (i.e. Windows, Excel installed, etc)
• The output is a bot that repeats the same mouse movements and clicks that a person would do to accomplish a certain task.
• They have an unlimited amount of integration possibilities, since they don’t rely on the vendor to expose an API.

Select major players and new entrants can be found in the table below:

Three of the largest players are UIPath, Automation Anywhere and BluePrism:

UiPath

• Founded in 2005, it has raised $1B from Accel, Sequoia, Coatue, and others. In 2016, the company had 100 customers; they now have over 5,000 of them, and crossed $360M in ARR in 2019.
• UIPath raised $750m at a $35B valuation in early 2021. The company has over $360m in revenues and 6,200 customers. The company is rumored to be going public in 2021.
• UiPath’s product is similar to ElectroNeek, but they differ in pricing. UiPath charges for each bot you create. This makes it too expensive for small/mid-market companies. An unattended robot is $8,000/yr, on top of a $20,000 annual Orchestrator License. ElectroNeek on the other hand charges a $16,000 annual fee per developer seat, and lets you build unlimited bots.
• On the tech side, UiPath only supports .NET and C# as scripting languages, while ElectroNeek supports Javascript. If we look at StackOverflow’s 2019 Developer Survey, we can see that almost 70% of professional developers surveyed use Javascript, while C# is only at 32%. .NET doesn’t even make the list, with the closest thing being VBA at 5%. This makes it very hard for companies using UiPath to find new developers to build and support their bots.

Automation Anywhere

• Founded in 2003, it has raised $840M from NEA, SoftBank, and others. In 2018, the company was doing ~$108M in ARR, growing at 47% YoY.
• The issues with Automation Anywhere are the same as UiPath: expensive product, supported by legacy programming languages that are hard to hire for.

BluePrism

• Founded in 2001, BluePrism is public on the London Stock Exchange. The company generates more than $125 million of revenues, with 96% recurring revenue and a 96% renewal rate. The company has 1,677 customers.
• The company provides a connected-RPA platform that is a Digital Workforce Operating System, consisting of a Process Studio to design automation workflows, a Digital Workforce to execute process workflows, and a Control Room for assigning tasks to Digital Workers.

An entrant with a novel approach (open-source) is Robocorp:

Robocorp

• Founded in 2018, Robocorp is pre-launch, but raised a Series A from Benchmark. The founders are the creators of the RobotFramework open source project (https://github.com/robotframework/robotframework), which has 4,400+ stars on GitHub. The framework runs on Python.
• The company’s business model is based on offering a cloud service to reduce the complexity of using the open-source tools, integrating elements such as security and identity management.
• It’s unclear how this will compete against ElectroNeek, but they seem to have different approaches, with Robocorp going after a bottoms up sales through engineers with their open source project, and ElectroNeek targeting “Citizen Automators” that fill non-technical roles.

Conclusion

We believe that ElectroNeek’s modern technology stack powered by Javascript, along with a business model that favors small and medium businesses, provides the company with an opportunity to capture a meaningful share of the mid-market RPA opportunity. This market segment is not being prioritized by incumbents, and ElectroNeek has a competitive advantage against new entrants.

TEAM OVERVIEW

The ElectroNeek team is well-positioned to build a company in the RPA space. Key executives include:

• Co-Founder and CEO Sergey Yudovskiy is a successful technology entrepreneur. He previously founded Terraline in Moscow, a leader in SMB Internet services. In 2016, he founded an RPA consulting company, which became the first UIPath implementation company in Russia, and the largest in Eastern Europe. He then decided to evolve this company into a software company.
• Co-Founder/CIO Dmitry Karpov previously worked at EY for 6 years. At EY, he assisted Fortune 1000 companies with implementing RPA projects. Dmitry initially shared with Sergey the concept of RPA, which spurred Sergey to found his RPA implementation company. Dmitry has a Masters of Science from UConn and an MBA from Georgetown.
• CTO Mikhail Rozhin is formerly a senior software developer at Acronis (currently valued over $1 billion), focused on designing web applications architecture.
• VP Sales Keith Abramson is an experienced software sales executive who has managed enterprise sales teams. He was previously Head of Sales at Kurtosys for three years, and before that was Director of Sales at Darktrace.

MARKET SIZING

We size ElectroNeek’s market on a top-down and bottoms-up basis. We use the same approach that we applied for the seed round, integrating updated metrics for both analyses.

Beginning with the top-down market sizing approach, see below our analysis which provides updated revenue figures for the major market players, as well as market sizing figures from the top analyst firms. The median overall RPA market sizing was $2.9 billion for 2020 and is projected to be $5.2 billion for 2021, according to analyst firms Statista, Gartner, and Forrester. The RPA market is projected to grow at a 4-year CAGR of 36%.

We also segment the market based on the revenue of the top market players. We calculate that the top 5 players, Blue Prism, Pegasystems, UIPath, Automation Anywhere, and WorkFusion, comprise $2.2B of revenue in 2020. This is equivalent to 75% of the total market in 2020.

We estimate the potential size of mid-market RPA based on the size of the enterprise market (see table below). We assume the mid-market is 20-25% of the total market. We believe that it has the potential to grow much larger over the long-term.

Our base case top-down RPA mid-market sizing is between $800m to $1.1B.

This sizing is greater than our estimated sizing at the seed round, reflecting fast growth of the overall market, and specifically the growth of the mid-market.